AT&T Breakup Threatened by Comcast Bid

If C. Michael Armstrong's legacy as the CEO of AT&T was not already in doubt, Comcast's $58 billion hostile offer to purchase the company's cable television unit leaves his tenure open to even more pointed questioning.

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If C. Michael Armstrong's legacy as the CEO of AT&T Corp., the largest U.S. long-distance company, was not already in doubt, Comcast Corp.'s $58 billion hostile offer to purchase the company's cable television unit leaves his tenure open to even more pointed questioning.

Armstrong planned to spin off AT&T Broadband, the nation's largest cable-TV operator, in late 2002 as part of his comprehensive plan to break AT&T into four parts. When the breakup plan was announced in October, Armstrong described it as the best means to "unlock" values currently hidden by the company's dominant operation, its long-distance voice business.

That is, he wanted to give the company's faster growing units  TV and wireless  an opportunity to win over investors on their own, without the drag of the long-distance business. A hostile takeover, though acknowledged as a possibility, was not part of the plan.

As Armstrong met Monday with the company's many bankers and lawyers, AT&T released a brief statement explaining that although it would evaluate Comcast's offer, it had no intention to veer from its plan to create a tracking stock for AT&T Broadband later this year and then 12 months later, spin it off.

As they usually do when faced with a large deal, investors penalized the proposed acquirer, Comcast, sending the company's stock down 7.8% to close at $38.98 a share. Meanwhile, shares in the potential target, AT&T, rose 11.84% to close at $18.70 a share.

If Armstrong elects not to negotiate with Ralph and Brian Roberts, the father-and-son chairman and CEO duo that control Philadelphia-based Comcast, he would again have to demonstrate to AT&T shareholders that his vision for the company is worth following.

When viewed from the perspective of today's comparatively depressed stock prices, Comcast's offer to issue 1.0525 billion of its shares for all of AT&T Broadband's shares seems solid, said Floyd Greenwood, telecom analyst at Prudential Securities Inc. Even when AT&T Broadband's debt is included in a valuation of the company, Greenwood estimates that Comcast, the No. 3 U.S. cable operator, would be paying about $3,900 for each of AT&T's 14.4 million cable TV subscribers, a premium to industry norms.

However, when viewed against the roughly $100 billion that AT&T paid when it purchased TCI International Inc. in 1999 and MediaOne Corp. in 2000, the Comcast offer represents a 40% discount.

But such a comparison may be unfair, Greenwood adds, since value of nearly all telecommunication assets are much lower than they were as recently as a year ago.

If shareholders do succeed in pressuring Armstrong to sell AT&T Broadband, the smallest but most valuable of the company's four parts, Comcast's hostile offer seems to leave both Armstrong and his legacy in the cold.

Comcast, whose daily operations are handled by CEO Brian Roberts, 41, made clear in Sunday's offer that a combined company would be managed from Market Street in Philadelphia with the Roberts family in charge. Such an arrangement would likely quash Armstrong's rumored interest to replace AT&T Broadband's current CEO, Dan Somer, once the breakup was complete.

"This has become a story about exiting gracefully, and that creates a unique challenge because it's no longer about pure valuation," Greenwood said. "On a pure valuation perspective, AT&T would be inclined to take the offer."

In a veiled reference to Armstrong, AT&T denied in its statement that in earlier discussions with Comcast, talks about a possible sale of AT&T Broadband broke down because of "social issues," the Wall Street euphemism for questions about which CEO will run a new company. Nonetheless, the issue of Armstrong and a future place for his team in a combined company would seem to be a large knot to untangle if the two sides did attempt to negotiate a friendly combination.

Armstrong's future aside, AT&T shareholders must decide whether to support the company's current plan to spin off broadband, or go with Comcast and its offer to pay $44.5 billion in stock and the assumption of $13.5 billion in debt.

Scott Cleland, telecom analyst at the Precursor Group, a Washington-based independent research firm, argued that if AT&T shareholders were given a choice between Comcast's current offer and Armstrong's proposed split off, the Roberts' would soon be adding AT&T Broadband's 14.4 million subscribers its own 8.4 million customers.

"Shareholders can choose between a company that has doubled the value of the S&P 500 over the last 28 years, which is Comcast, or a company which has destroyed more cable value faster than any cable company in history, which is AT&T," Cleland said.

Regardless of whether Comcast succeeds in acquiring AT&T Broadband, Armstrong's vision of a restructured AT&T remains largely intact. The company completed its spinoff Monday of AT&T Wireless, a debt-for-equity transaction in which the company exchanged 94.5 million shares in the unit, and in the process retired about $1.6 billion in debt. AT&T retained about $3 billion of the company's stock, about 7.3% stake.

According to the Armstrong plan, the company's remaining businesses, its corporate services unit as well as its high-speed Internet and Internet-access operations, are to be placed in the AT&T Business unit and continue to trade as AT&T. The company's residential long-distance business is scheduled to be spun out as a tracking stock under the name AT&T Consumer some time next year.

Through its break-up, AT&T has used at least four major investment banks as advisers. Goldman, Sachs & Co., headed by Gene Sykes and Jack Levy, and Credit Suisse First Boston, headed by Christopher Lawrence and Wendy Dietze, have done much of the work although teams from Salomon Smith Barney Inc., headed by John Otto, and Merrill Lynch & Co. have also worked for AT&T. Merrill's telecom team is headed by Victor Nesi and Tom Middleton.

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